MauledAgain

Prof. James Edward Maule's more than occasional commentary on tax law, legal education, the First Amendment, religion, and law generally, with sporadic attempts to connect all of this to genealogy, theology, music, model trains, and chocolate chip cookies. Copyright 2004-2012 James Edward Maule.

Monday, December 31, 2012

Is This Tax Preparation Nightmare Reawakening?

Almost ten months ago, in Tax Return Preparation Disaster, I wrote about a tax return business called Mo’ Money Taxes, that had created nightmares for its clients. It has been sued by various state attorneys general, charged with filing inaccurate returns, imposing hidden fees on its clients, withholding client refund checks, distributing checks in amounts less than promised, and distributing checks that could not be chased. Reports circulated that thousands of tax documents related to its clients were found in dumpsters behind its offices. Other reports explained that the owner of the business was involved in a contentious divorce proceeding, replete with claims of physical assaults, adultery, unfit parenting, and drug use.

About a month ago came news, that reached me recently, about the latest undertakings by Markey Granberry, the owner of Mo’ Money Taxes. Although the lawsuits commenced by the attorneys general continue, and although employees of Mo’ Money Taxes have been indicted, Granberry has announced the establishment of a new tax return preparation business called Marquis Taxes. He explained that, with respect to the allegations arising out of the 2012 filing season, “thus far, no charges have been filed against no one regarding issues of last year.”

My advice to taxpayers is that they ought not retain a tax return preparer until they have done due diligence and research, particularly opinions from existing clients, about the reputation and quality of the potential preparer. My concern is that the people most often victimized by the unscrupulous companies are those least able to check out the business. That is why the idea of requiring tax return preparation be done by preparers who have earned an IRS-issued “seal of approval” is so tempting. Given the choice between a bigger government or thousands of victimized taxpayers, I’m compelled to choose the former, even though ideally I’d prefer to purge the marketplace of the perfidious businesses.

Until the litigation underway in several states is concluded, and until the charges against the indicted employees are resolved, the key words are research and caution. Why risk it?

Friday, December 28, 2012

When Tax Revenues Fall Short, Who Gets Paid?

Almost two years, in The Price of Insufficient Tax Revenue, I described how the “success” of tax reduction in New Jersey compelled the city of Camden to lay off half of its police force and one-third of its fire fighters. A few weeks later, in When Tax Cuts Cause Privatization, Taxpayers Pay More, Not Less, I explained how Camden also was compelled to fire its animal-control officers, with their jobs turned over to a private company, at a cost exceeding what it cost to employ the animal-control officers. It’s easy to identify the winners and losers in this tax-cut game.

Now comes news that another city in fiscal trouble, Oakland, California, dealt with the impact of revenue reductions by laying off one-fourth of its police force. Oakland ranks fifth among American cities when it comes to crime rates. Discharging 25 percent of the police force is a foolish thing to do. Oakland police have confessed that someone calling 911 is “looking at an indeterminate amount of time before an officer can respond.” Crime rates in Oakland have soared since the cuts took effect.

Oakland, facing a $32 million deficit, did not touch a $17.3 million payment that it makes to the Oakland Raiders and the Oakland Athletics. The Raiders, however, are not content with these payments. Instead, the team threatens to move to Santa Clara unless Oakland forks over support for a $1.5 billion stadium.

Oakland is not the only city that chose private professional sports over police protection for its citizens. Jacksonville fired police and cut other services so that it could repeatedly reduce the rent that it charges the Jaguars for use of the stadium partially funded by taxpayer dollars. Taxpayer dollars support professional sports teams throughout the country. Most of those teams are owned by billionaires.

The anti-tax crowd, oblivious to the harm that tax cuts do to ordinary citizens, backs tax increases when the revenue is funneled into private enterprise. For example, Indiana increased hotel, rental-car, and food and beverage taxes to fund the stadium used by the Indianapolis Colts. Reversing foolish tax cuts to provide revenue to care for the needy is some sort of outrageous sin in the minds of the anti-tax crowd, but jacking up taxes to pump money into the hands of the wealthy seems to be some sort of virtue to these folks.

It is outrageous that the anti-tax crowd casts into a “47 percent net” the people it considers to be “takers.” These folks do this without regard to whether the “taker” is a disabled military veteran, a person disabled by disease caused by private enterprise pollution of air and water, a person unable to work because of the consequences of being the victim of a crime that could not be prevented because a city had to let police officers go, a person disabled when doing a good deed to save the lives of innocent people, or a firefighter injured on the job. Yet when the rich show up, hat in one hand, bully-club in the other, these same opponents of “taking” start handing out taxpayer dollars to wealthy individuals and corporations, justifying their hypocritical decision with every possible baseless excuse available.

The typical justification that it is good for everyone to cut the taxes of the wealthy, or that it is good for everyone to collect taxes from everyone and funnel the proceeds into the hands of private corporations and rich individuals, has been disproven repeatedly. These actions have not generated jobs. They have reduced public safety. They have failed America.

Wednesday, December 26, 2012

Why Not Read the Entire Sales Tax Statute?

A little more than a month ago, in A Not So Dopey Tax Question, I considered a tax question raised by the operator of New Jersey’s first legal marijuana dispensary. The question is easy to frame. Is medical marijuana sold in New Jersey subject to the New Jersey sales tax? At the time, the dispensary had not received an answer. I examined the New Jersey sales tax statute and concluded that medical marijuana is exempt because it meets the statutory definition of a drug sold pursuant to a doctor’s prescription, citing section 54:32B-8.1(a) of the New Jersey statutes, which provides an exception to the general rule of sales taxation in section 54:32B-3(a).

On November 30, the Regulatory Services Branch of the New Jersey Division of Taxation issued a Technical Bulletin in which it provided its answer to the question. It took several weeks for this publication to reach me.

According to the Division of Taxation’s TB-68, which “is based on current New Jersey law and governing regulations regarding the medical use of marijuana, . . . retail sales of medical marijuana are subject to [sales] tax.” The Bulletin cites section 54:32B-3(a) of the sales tax statute. The Bulletin then addresses the applicability of the sales tax to purchases of equipment used in the production of medical marijuana.

That’s it. Nowhere in the Bulletin does the Division of Taxation mention, analyze, or deal with the applicability or non-applicability of section 54:32B-8.1(a). If a law student writing a paper on this issue failed to mention, cite, analyze, or deal with section 54:32B-8.1(a), he or she would be heading for a rather unpleasant grade. It’s not as though that provision is buried in some other volume or many pages distant in the same volume. Depending on pagination and the publisher, and whether or not the volume in question contains annotations, it’s on the same page or the next page. Law students are taught to look at the entire provision to determine if any exceptions apply. Nothing in the Technical Bulletin reveals whether it was written by someone with a legal education, but even someone without a legal education ought to understand the need to look beyond the general rule.

My point isn’t so much whether or not section 54:32B-8.1(a) applies. I think that it does. My point is that the Division of Taxation didn’t even consider it, or, if it did, chose not to favor the taxpaying public with the benefit of its conclusion. At best, this is sloppiness. It could be worse than that. It’s possible that someone decided that politically, the Division ought not say anything one way or the other about section 54:32B-8.1(a). If that’s the case, it is an outright violation of the fiduciary responsibility vested in the Division of Taxation not only to interpret and administer the tax laws appropriately, but to exercise such transparency as is required to permit taxpayers to understand the tax law so that they can comply. Regulation by fiat is not a cornerstone of a healthy democracy.

Monday, December 24, 2012

Tax Pledges: Never Say Never

When House Speaker John Boehner floated his since-abandoned “Plan B,” he put most Republican members of Congress into a bind. Under Plan B, tax rates on individuals with income above $1 million would revert to the higher rates in effect before the Bush tax cuts were enacted. Though this expiration of a tax cut is simply that, the anti-tax crowd considers it to be a tax increase. Accordingly, the legislators who had signed on to Grover Norquist’s anti-tax pledge had to choose between supporting Plan B and violating the pledge, or opposing Plan B while holding fast to the pledge. As it turned out, informal canvassing suggested to Boehner that it would not make sense to put Plan B to a vote.

According to this report, Norquist conjured up “political cover” for his devotees, telling them that “they could support the Boehner plan B because it adhered to the meaning of their promise to oppose tax hikes.” How can that be? If someone decides to give up smoking, does the occasional cigarette not count because it “adheres to the meaning of their promise”? If a youngster promises his or her parents that they will not drink and drive, is driving after having one drink insufficient to put the youngster over the legal limit “adhere to the meaning of the promise”?

When people make absolute, unconditional promises, they end up trying to wiggle out when they discover that they have painted themselves into a corner. Life is full of anecdotes telling of conversations between a person who makes an absolute statement and who, when questioned about the applicability of the statement to a situation demonstrating the absurdity of the absoluteness of the statement, hems and haws and wiggles and dances in an attempt to defend the indefensible.

An example of this slippery slyness comes directly from Norquist and his allies. About a year and a half ago, in Tax Semantics, I explained the backpedaling that tainted Norquist’s attempts to walk his silly anti-tax tightrope:

First comes news that Grover Norquist described expiration of the Bush tax cuts as not a violation of his no-tax-hike pledge. He said, “Not continuing a tax cut is not technically a tax increase.” Speaker of the House John Boehner countered that allowing the tax cuts to expire would be the equivalent of a tax hike.

Then Norquist’s Americans for Tax Reform issued a statement explaining that failing to extend or make permanent the Bush tax cuts “would clearly increase taxes on the American people” and that “[i]t is a violation of the Taxpayer Protection Pledge to trade temporary tax reductions for permanent tax hikes.”

Is it any wonder that the Congress is so dysfunctional? Infected by absolutists who resist negotiation and compromise because it would demolish the foolish principles underlying their extremist stance, they prefer to defend their silly statements and pledges rather than doing their job of solving the mess they created.

It takes a good deal of courage to confess to having signed a foolish pledge. It takes a good deal of wisdom to understand that the pledge is foolish. It takes a good deal of honesty to explain to America why the foolish pledge is causing so much harm. Will the nation see these qualities coalesce in its Congress?

Now comes yet another poll that tells us that although most Americans support raising taxes for people with incomes over $250,000, and think that this is insufficient to solve the budget problem, they also oppose cutting spending for Medicaid, cutting military spending, increasing the Medicare eligibility age, or slowing the increase in social security benefits. If those steps are not taken, there is no way to eliminate or reduce the deficit absent tax increases for many more taxpayers than simply those with incomes over $250,000.

When there is a problem, the cause matters, because the cause provides pathways to solutions. Refusal to identify the cause of a problem slows or blocks the development of a remedy. “Just fix it” is much easier to accomplish when the cause is known. Understanding the cause also reduces the chances of the problem resurfacing.

The so-called fiscal cliff, or budget deficit issue, arises because of two decisions. One was the decision to reduce tax revenue, to the point where total revenue is lower than it has been for many decades. The second was the decision to add trillions of dollars to military and homeland defense spending without raising taxes to defray the cost. The first decision came with the same disproven claim that it would create economic growth and in turn increase tax revenues that failed when previously attempted. Instead, millions of Americans lost jobs, the economy plunged into one of the nation’s worst recessions, and economic growth stagnated. The other decision, regardless of one’s views on the necessity of the actions that were undertaken, added trillions to the budget deficit.

I have explained the arithmetic several times, in posts such as A Memorial Day Essay on War and Taxation, Peacetime Tax Policy While Waging War = Economic Mess, Some Insights into the Tax Policy Mess, What Sort of War is the “Real Budget War”?, andBorrowing Money to Fund Tax Cuts. I have pointed out that war requires sacrifice, that sacrifice for the sake of war means giving things up to finance military expenditures, that the idea of having both guns and butter has been tried and disproven numerous times, and that the nation would have collapsed had the Bush era approach to fiscal and budget policy been followed during World War Two. Several readers have commented that I am wrong because “this isn’t 1941.” Unless someone can prove otherwise, cutting $100 of revenue from a balanced budget while adding $900 in expenditures generates a deficit, now, in 1941, in 2001, in 2003, and in any other year. Every attempt to prove that it is possible to cut revenue, add expenditures, but not create a deficit relies on what a Republican president aptly called “voodoo economics.”

The first cause of the problem can be fixed by taking two steps. Although the first seems to be facing less political opposition, the second would generate howls of protest. The first step is to repeal the Bush tax cuts. For everyone. The second is to collect the revenue that would have been collected had the Bush tax cuts not been enacted. Of course, that isn’t going to happen. Translation: the problem isn’t going to be solved unless the second cause of the problem generates a solution.

The second cause of the problem can be fixed in one or both of two ways. The first way is to cut back military spending to adjust for the deficit spending of the past decade. That, according to the poll, is unpalatable to the majority of Americans. The second way is to find revenue to pay back the debt incurred to finance expenditures that were undertaken without a supporting revenue base. But that brings us back to the first cause of the problem and the inadequacy of the solutions reflecting that cause.

This is why the folks who created the problem try to divert attention to solutions that do not reflect the cause of the problem. Cutting social security, whether by slowing increases, changing eligibility ages, or otherwise, is a scapegoat approach. It is a diversionary tactic designed to take Americans’ eyes off of the actual causes of the problem. Social security did not cause the problem, and in fact it financed part of the Bush era deficit. Social security will pose budgetary issues in the future, and things need to be done to cut those problems off at the pass, and may include slowing increases and raising eligibility ages, but that ought not be something used to pay for foolish tax cuts and deficit military spending of the past decade. The same can be said of Medicare, which faces future problems very soon. Other programs, such as food stamps, educational assistance, veterans’ benefits, and similar social net expenditures, not only are not the cause of the problem, but are symptoms and by-products of the underlying causes. For example, the increased spending for veterans’ benefits is an additional cost of the two wars. The increased spending for food stamps is a direct consequence of the economic collapse spawned by foolish decisions in the early part of the last decade, including not only unwise tax cuts and deficit military spending but unfettered bad behavior by too many unregulated actors in the so-called free market. In any event, cutting every federal expenditure aside from military spending, interest on the debt, social security, Medicare, and Medicaid will not balance the budget or even come close.

The solution to the budget deficit will be painful. It is the pain that should have been felt by all Americans, and not just members of the military and their families and friends, while the nation engaged in war. It is postponed pain, and it is inevitable. If the budget deficit is not solved, and the nation goes over the fiscal cliff, there will be pain. There is no escaping the economic pain. To quote another Republican president, “I don’t like it but there it is.”

Wednesday, December 19, 2012

User Fees: When Users Should Pay

In some areas of this country, the words “beach tag” can spark intense discussions and even arguments. For some people, the thought of being charged to use a beach is as repugnant as the thought of being charged to breathe. For others, the idea of requiring people to pay for the maintenance, repair, and security of what they are using makes all the sense in the world.

Last year, in Free, Freedom, Fees, and Taxes, I commented on a proposal by the town of Wildwood, New Jersey, to cut more than half of its police force and some of its firefighters because of budget shortfalls, even though Wildwood remained one of the few towns in New Jersey that did not charge a beach tag fee. During the summer, the population of the town increases from 5,000 to 300,000, and yet the opponents of beach tag fees somehow think that the 295,000 should enjoy themselves while letting the 5,000 bear the burden of the cost of maintaining the beaches, and providing security, rest rooms, clean-up, and other services. Though the anti-tax crowd often points to the inequity of asking a few to pay for the many, in this instance the anti-tax crowd asks for the few to pay for the many. Why? Because it has nothing to do with consistent and coherent tax policy, and everything to do with where people live. For the most part, the 295,000 visitors don’t want to pay beach tag fees.

Last June, in Limiting User Fee Use: Beach Tag Fees, I criticized the opposite situation, one in which towns were collecting more revenue from beach tag fees than was necessary to maintain the beaches and using the surplus to offset local taxes. In this situation, figuratively speaking, the 295,000 were being asked to pay for benefits accorded the 5,000.

Now, comes another story about beach tags. This time, two New Jersey legislators, one from each side of the aisle, are co-sponsoring a bill that requires elimination of beach tag fees by any town that accepts state or federal aid to rebuild its beaches. One of them claimed that a beach fee is just “another word for tax.” His argument is that if federal and state tax revenues are used to rebuild the beaches, it is unfair to charge him to use the beach because he has already paid for it. The absurdity of his argument is easily in this parallel proposition: “I bought my house for cash. It is unfair to make me pay for electricity and water for my house because I’ve already paid for the house.” Beach fees deal with annual operating costs of a beach. Disaster relief payments from the state and federal governments are capital investments, in contrast to annual expenses.

One of the legislators proposing the beach tag fee repeal defended the idea with a typical theoretical gloss that lacks practical sensibility. He explained that beach towns could be more efficient, pointing out that these towns have a police chief, an administrator, and a public works director. So what’s his idea? That one person do all three jobs? Perhaps he thinks that the 8-hour workday should be replaced by a 24-hour workday? Even aside from the fact that these individuals often work 16-hour days, especially in the summer, his comment indicates a total lack of understanding of what these people do and why few people would be qualified to do all three jobs.

The mayor of one beach town explained that if beach fees were eliminated, there would be less money for lifeguards and beach clean-up. So, those brilliant legislators ought to consider that if they succeed, they will be permitted free access to a filthy beach with no lifeguards. You get what you pay for.

The mayor of another beach town pointed out an interesting twist in the situation. Its agreement with the Army Corps of Engineers is that if the dunes were damaged, they would be replaced at no charge to the town. This mayor expressed a belief that the proposed legislation would not apply. I have a hunch that the legislators would take the opposite position.

As the mayor of yet another beach town explained, if beach fees are eliminated, the cost of maintaining the beaches will fall on the town’s taxpayers. If the federal and state governments want to pay for lifeguards, rest rooms, beach clean-up, and the other services provided by beach tag revenues, elimination of beach fees could be justified. Yet taxpayers who do not use the beach understandably would object. It’s one thing to use general taxes to repair dunes to preserve barrier islands that in turn protect the mainland, benefitting those who live there no matter whether they use the beach or not. It’s another thing to eliminate beach fees on the pretext that general funds were used to restore the capital, because it leaves the beach towns without revenue to pay for annual operating costs.

Monday, December 17, 2012

Go Ahead, Cut Taxes

A little more than a year ago, in Infrastructure, Tolls, Barns, Jackasses, and Carpenters, I explained why the anti-tax and anti-toll forces have it all wrong. I pointed out that without taxes or tolls, highways would become, at best, rutted gravel roads. Five years ago, in Funding the Infrastructure: When Free Isn't Free, I pointed out that failure to repair and replace infrastructure will cause an economic collapse far worse than the supposed economic misery falsely offered by the anti-tax and anti-toll forces as the outcome of undoing the tax policy foolishness of the Bush tax cuts.

Last Friday came news that the Southeastern Pennsylvania Transportation Authority (SEPTA), a government agency that oversees public transit in the greater Philadelphia area, will close the bridge that carries Norristown High-Speed Line trains over the Schuylkill River. The reason is simple. The wooden ties on the bridge are rotted. The steel spikes holding the rails are coming loose. It is rusting. Its concrete piers are cracking. About the only good news is that SEPTA has had the sense to figure out there is a problem and to close the bridge before anyone is killed or injured, unlike what has happened in the past, continues to happen, and will happen with increasing frequency as the price society pays for the self-centeredness of the anti-tax crowd comes due.

It gets worse. The underfunded SEPTA expects more bridges and other infrastructure to be shut down, for the same reason. To get an idea of how bad the problem is, consider that the cost of fixing the bridge in question is $30 million. SEPTA estimates that it needs $5 billion to eliminate the backlog in infrastructure repair. That’s a lot of bridges and other things that will shut down if politicians fail to exercise their fiduciary responsibilities in a mature manner. Last year, the Congress blocked the Administration’s plan to infuse money into infrastructure repair, which, by the way, would create more jobs than have been created by the tax cuts that were guaranteed to create jobs.

It gets worse than worse. So how will SEPTA deal with its customers who need to cross the river, if there is no bridge? It will unload passengers from the trains, put them on busses, and drive the busses across the river. Three things will happen. First, passengers will waste time because of the longer commute, which in turn hurts the economy. Second, at least some, perhaps many, of those passengers will abandon public transportation and take to their vehicles, putting more stress on the highway infrastructure, and increasing commuting times for others, which in turn hurts the economy. Third, the busses that SEPTA adds to the highway bridge traffic also will have the same effect.

My prediction is that the anti-tax forces will rise up and yell for their favorite solution, the usurpation of government functions by their private sector heroes. The private sector does two things when it takes over government. First, it factors in a profit for themselves that government does not seek. Second, it uses bullying techniques to cut wages and drive the middle-class public servants into the ranks of the impoverished. Focused on the short-term instant profit effect, and oblivious to the long-term detriment to the economy, the private sector can engage in these tactics because it is immune from the ballot box. I have previously explained this problem in posts such as How Do Toll Road Lessees Make a Profit?, Are Private Tolls More Efficient Than Public Tolls?, More on Private Toll Roads, and When Privatization Fails: Yet Another Example.

One must wonder whether the attempt to shrink government by denying it the revenues necessary for it to do its job is part of a larger plan to privatize government and return society to the days of nobility and peasants, in which government was nothing more than the whim of the king and his elites. Perhaps they think that as the bridges close and collapse, the highways fall apart, the public education system continues to deteriorate, and the quality of life for all but the elites continues to decline, that frustrated and unhappy people will voluntarily dance to the tune of the privatized pied piper. Perhaps their confidence in their piper’s siren song is well-placed. Perhaps not. But if the people’s representatives in legislative bodies throughout the nation don’t step up and do what needs to be done, the consequences of collapsing infrastructure is not going to be pretty.

Friday, December 14, 2012

When a Tax Argument is Nonsense, Why Not Say So?

The first-time homebuyer credit has again been litigated. Three weeks ago, in When the IRC Defines a Term, It Trumps Other Definitions, I explored a case in which the Tax Court rejected the taxpayer’s argument that the definition of a term found in the Internal Revenue Code should be set aside in favor of a definition from another federal agency. Proving that taxpayers will do almost anything to grab a social-policy tax credit, the taxpayers in the most recent first-time homebuyer credit case, Morales v. Comr. T.C. Memo. 2012-341, raised a rather bewildering argument.

On April 27, 2006, the taxpayers sold their principal residence. The title company filed a Form 1099-S, Proceeds from Real Estate Transactions, with the IRS. On March 17, 2009, the taxpayers purchased a property on which there were two separate houses. Each of the taxpayers moved into one of the houses and used it as his or her separate personal residence. Each taxpayer filed a 2008 income tax return, and each claimed an $8,000 first-time homebuyer credit.

The Tax Court easily determined that the taxpayers were not entitled to the credit. One of the requirements for a taxpayer to claim the credit is that the taxpayer must not have had a present ownership interest in a principal residence during the 3-year period ending on the date of the principal residence for which the credit is sought. The petitioners purchased the new principal residences on March 17, 2009, which meant that if they owned a present interest in a principal residence at any time between March 18, 2006 and March 17, 2009, they did not qualify for the credit. The taxpayers owned a principal residence from March 18, 2006 through April 27, 2006, and thus they were not entitled to the credit.

The taxpayers argued, however, that the IRS was estopped from asserting that they were not entitled to the credit because “an ordinary examination of the relevant tax documents,” presumably the Form 1099-S, would have indicated that the taxpayers did not qualify for the credit. The Court rejected the argument for two reasons. First, it would place an undue burden on the IRS. Second, it would undermine the effective administration of the tax laws. I would add a third reason. The argument is total nonsense. Examination of the Form 1099-S, together with the 2008 return, would indicate to the IRS that the taxpayers were not entitled to the credit. It is quite probable that the IRS did examine that form, and that’s how the taxpayers’ return was pulled for an audit. The taxpayers’ idea that if the IRS can determine there is an error on a return from looking at the relevant tax documents it is estopped form doing anything about it is absurd. Using the taxpayers’ argument, if a person failed to report wages that showed up on a W-2 filed with the IRS, the IRS would not be permitted to require that person to report the wages. Though it may have been a matter of judicial tact to state the reasons for rejecting the argument in the manner that the court did, there are times, I think, when calling nonsense what it is, nonsense, is valuable. Otherwise, the producers of the nonsense will generate even more nonsense. If one thing is clear, it is that the world doesn’t need more of this sort of nonsense.

Now there is good news from Ohio. Technically, the news is old, and what is new is a recent case from the Supreme Court of Ohio that brought to my attention a provision in the Ohio Constitution, adopted in 1947, that specifically prohibits the use of motor fuels taxes for anything other than fixing roads, bridges, and other transportation infrastructure. In Beaver Excavating Co. v. Testa, (Dec. 7, 2012), the Court held that diversion of commercial-activity-tax (CAT) revenues derived from the gross receipts of motor vehicle fuel sales to non-highway purposes violates Article XII, Section 5a, of the Ohio Constitution. One of the interesting aspects of the case is that the plaintiffs included not only businesses paying the tax in question but also county engineers complaining that the diversion was impairing their budgets for transportation infrastructure projects.

The Court pointed out that the Constitutional provision in question was enacted specifically to limit the use of motor vehicle fuels taxes to transportation purposes. The provision was enacted to put an end to the then-existing practice of using motor vehicle fuels taxes for other purposes. The description of the Amendment is more proof that some things just don’t change: “This Amendment simply says you want your automobile license and gas tax money to go for better roads and streets. * * * Ohio originally promised that automobile license and gas tax funds would go for roads, streets, and related purposes. But
temptation was too great and millions of these special tax dollars have been and are being spent for other purposes.” One must wonder why, with the Amendment having been adopted by the voters, there was need for litigation in 2012.

In 2005, the Ohio General Assembly enacted the CAT to replace the corporate franchise and personal property taxes. The CAT is imposed on business gross receipts. Gross receipts do not include amounts paid by licensed motor-fuel dealers, licensed retail dealers, or licensed permissive motor-fuel dealers in state and federal motor fuel excise taxes with respect to motor-fuel receipts. CAT revenues are deposited in the state’s general fund. The Court concluded that the CAT is a tax that relates to motor vehicle fuel sales, and that to the extent that it does so, the revenue it generates from those sales must not be used for non-highway purposes.

The Court concluded that it was not improper for the state to collect the tax, but that it was a violation of the Ohio Constitution to spend it other than in accordance with the transportation-purposes-only requirement. The plaintiffs did not seek a refund, but an order requiring compliance with the expenditure limitation. Nor did they ask that revenues already improperly spent be restored to the transportation fund. Accordingly, the Court applied its decision prospectively.

The Ohio Constitution provides a model for provisions that protect those who pay taxes, user fees, and tolls from seeing their payments diverted to improper uses. Similar provisions might exist in other states; I haven’t looked because whether or not they do, they ought to exist in every state. I wonder how many state legislators and state employees making spending decisions have read the provision. If they haven’t, it’s time to do so and, while they’re at it, to look at this recent Ohio Supreme Court decision.

Monday, December 10, 2012

When Tax Revenues are Short-Changed, What Should Be Cut if Taxes Are Not Raised?

A recent poll has reinforced the inescapable conclusion that Americans, as a group, are illogical when it comes to tax and spending policies. When asked whether budget deficits should be reduced by raising taxes or by cutting government spending, 46 percent chose spending cuts and 30 percent chose tax increases. As described in this summary of the poll, in February 2012 the spending cut option found favor with 56 percent, and in March 2011, 62 percent preferred spending cuts.

But when asked to choose which programs should be cut, poll respondents did a collective about face. Raising the eligibility age for Medicare found favor with only 40 percent, in contrast to 48 percent who opposed the idea. Slowing the growth of Social Security benefits was rejected by 70 percent of respondents. Military and defense budget cuts were opposed by the majority of those polled. Spending on those three programs constitutes a little more than one-half of total federal expenditures, although Social Security, standing alone as a separate trust fund, actually generates a surplus at the moment which is used to fund deficits in other areas of federal spending.

According to the poll, 68% of the respondents favor cutting programs and services, whereas only 23% advocate increased taxes. Of those answering the poll questions, 75% support a wage freeze for state workers, and 61% advocate laying off state workers. Not one of several state programs nominated for reduced state funding gathered the support of a majority of the poll's respondents. Only 41% wanted to cut economic development spending, 30% would vote for reduced social services funding, a mere 11% favored cuts in education spending, and a scant 7% stood up for reduced health care expenditures.

This lack of unified focus shows up in how New Jersey residents dealt with specific questions. With respect to state spending for local government and schools, 60% want it to remain the same, 20% want an increase, and only 16% favor a reduction. Though 54% oppose school vouchers and 55% do not want to expand charter schools, 51% want increases in state spending on early childhood education.

These results prompted me to write:

The poll reinforces my contention that the underlying problem is the continued demand for government spending on programs that benefit state residents coupled with a continued resistance to the idea of paying taxes in order to fund those programs. The results of the poll suggest the extent to which various programs benefit residents. That explains the support for maintaining or increasing tax rebates even though it requires higher taxes on someone in order to do that. It also explains why so few favor cuts in health care, education, and social services funding, why gasoline tax increases aren't preferred, and why so many were quick to target state employees for pay freezes and furloughs.

This sort of entitlement mentality, a vision that grows out of the "I want, I got, I will continue to get" experience of too many people, suggests that finding a common ground to resolve the tax and spend debate in New Jersey, and elsewhere, will be difficult if not impossible. It's amusing to see that almost everyone understands there is a problem, almost half think it will get fixed, but fewer than half can rally around any specific solution to the fiscal mess.

When asked about ways to cut the state’s budget deficit, respondents preferred spending cuts to tax increases, but they also rejected spending cuts for programs constituting 85% of the state’s spending. The notion that “trimming waste,” as some suggested, can balance the budget when deficits are gargantuan is, as has often been demonstrated, nonsense.

This discrepancy between the desire to pay little or no taxes but yet to benefit from government programs is at the core of the current fiscal crisis in Washington. Things were working well until some geniuses decided, early in the last decade, to cut taxes and to increase federal spending at the same time. Is not the solution to un-do the behavior that caused the problem? What would be the status of the federal budget and the deficit if taxes had not been cut in 2001 and in 2003? What would be the status of the federal budget and the deficit if the increased spending during the past decade had been financed with taxes rather than debt? What would be the status of the federal budget and the deficit if the taxes had not been cut and the spending had been financed with taxes? The answer is obvious, but discussion tip-toes around it, because too many of those responsible for solving the problem had their hands in creating it, and lack the courage to admit their mistakes and to make amends. Political reputation and re-election appear to be more important to these folks than is the overall welfare of the nation.

Friday, December 07, 2012

Liquid Fuels Tax Increases on the Table

According to this story, calls for increases in gasoline and other liquid fuels taxes are being put forth by those who understand the need for transportation infrastructure repair funding and who appreciate the declining value of existing fixed-amount taxes that do not reflect the impact of inflation since the taxes were last established. Support for, or at least willingness to consider, the increases is coming not only from the expected people and organizations but even from some who subscribe to anti-tax-increase philosophies. For example, Pennsylvania’s Governor Corbett, no fan of taxation, has admitted to “mulling an increase in one component of Pennsylvania’s gas tax.” New Jersey’s Governor Christie, another critic of taxation, is being pressured to increase gasoline taxes to fund restoration of highways and bridges damaged by Superstorm Sandy. The Republican chair of the House Transportation Committee expressed a “need to explore” the possibility of increasing the federal gasoline tax.

The gasoline tax is an inefficient way of funding the transportation infrastructure. Because it is set as a fixed number of pennies per gallon, decreases in sales – due to fewer miles being driven, more efficient vehicles, increases in the use of alternative fuels, or other causes – translates to a decrease in funding, even though there is not a concomitant decrease in the deterioration of roads and bridges. Add to that the impact of inflation, which increases the cost of repairs, but which is not reflected in adjustments to the fixed per-gallon tax amount. The federal gasoline tax was last adjusted 19 years ago. New Jersey adjusted its gasoline tax 24 years ago, and Pennsylvania’s last reset was 15 years ago.

Last year, in the Philadelphia area, only $1.4 billion was spent on a system that needs $2.5 billion a year to remain safe and functional. Which anti-tax advocate wants to be on the bridge that collapses because there was no money for repairs? One of the proposals being examined by Governor Corbett would increase the gasoline tax by 22 cents per gallon, though phased in over five years. At present, this tax is capped at a per-gallon price that is roughly half the current market price. In New Jersey, advocates of an increase are trying to sell a 10 cent increase, which would still leave New Jersey with one of the lowest gasoline taxes in the country.

Wednesday, December 05, 2012

The Hidden Government Spending Game

The other day, a reader alerted me to a New York Times story that resonated with some positions I’ve taken with respect to federal, state, and local tax breaks for private companies, and Paul Caron picked it up in his Monday TaxProf blog items.

The point made by the story in its extensive analysis of private company tax breaks is a simple one. Governments give tax breaks to companies because the companies promise economic advantages to the government and the people within its jurisdiction, but far more often than not the companies renege on their part of the deal and the governments end up in a worse economic position than they be absent the tax breaks. A similar conclusion was reached in a Oregon Public Interest Research Group report on Oregon tax credits. The conclusion reached in these and similar reports is not a surprise, as it is something that I’ve been suggesting for quite some time. In posts such as Tax Breaks, Politician Takes, Using Taxes to Rescue a Non-Drowning Film Industry?, Do Profitable Companies Need Tax Breaks?, You’ve Gotta Give ‘Em (a Tax) Credit?, When Spending Exceeds Revenue, Hand Out Tax Credits? Really?, and Are State Tax Incentives Worth It?, I criticized special tax breaks because they are unwarranted government spending that benefits private companies and that provide an insufficient economic return on the expenditure. I argued that profitable companies do not need tax breaks, and unprofitable companies ought not be kept afloat with tax dollars because those companies either are engaging in activities rejected by the market or are engaging in de facto unprofitable but necessary activities that belong within the scope of government activity subject to public ownership rather than private inurement.

These tax breaks are nothing more than welfare payments to private enterprise. Opponents of social welfare spending defend these outlays with as much passion as they bring to their attempts to end government assistance for individuals in need of help. One of their favorite arguments is that these tax breaks do not constitute spending because they simply permit a taxpayer to keep the money that belongs to it. This argument is raised in commentary such as Education Tax Credits Are Not Government Subsidies. The reason the argument is wrong can be illustrated by an example. Assume that a government imposes an income tax equal to 20 percent of income, however defined. Taxpayers have income of $100,000,000 and pay $20,000,000 in income taxes. Along comes a special interest group that lobbies for an income tax credit equal to 10 percent of the cost of filming a movie within the jurisdiction of the government, and that the credit will bring $10,000,000 of movie making business into the jurisdiction. The group claims that the $1,000,000 credit will generate more than $1,000,000 of additional tax revenue for the government because of the economic activity triggered by the movie making activity. What the reports are telling us is that these predictions, not unlike those about trickle-down economics and job-creating tax cuts for the rich, are bogus. What the credit requires is one of three things, or some combination thereof. First, all taxpayers other than the movie company must collectively fork over $1,000,000 to make up for the lost revenue. Second, the government must borrow $1,000,000 and incur a deficit. Third, the government must cuts vital services to prevent a deficit from being incurred, thus depriving other taxpayers of $1,000,000 of services for which they have paid. As I explained in Using Taxes to Rescue a Non-Drowning Film Industry?:

In order for the tax burden of the film industry, for example, to be reduced, the tax burden of other taxpayers must be increased. Or, state tax expenditures on health, safety, education, and other essential and legitimate government services need to be cut, shifting the cost to the population generally, particularly through increases in local taxes. This puts upward pressure on the wage demands of workers in the state, it puts upward pressure on prices charged by other entrepreneurs in the state, and it puts upward pressure on interest rates as localities increase borrowing to cope with the impact of the state income tax incentive. Though the arrival of a production in the state brings a temporary boost to that state's economy, particularly that of the area in which the production exists, it isn't necessarily sufficient to offset the negative impact of the true cost of the specialized tax incentive. After all, the decision to bless one industry, thus shifting costs to another industry, may encourage those other industries to leave the state.

Even if one accepts the idea that this sort of government spending isn’t spending but a mere tax reduction, providing tax breaks to one group of taxpayers but not to another means that taxpayers not getting a special tax break are paying taxes at a higher rate that are those feeding at the tax break trough. One would expect the anti-tax crowd to express deep indignation about this sort of hidden tax burden, and although some who subscribe to the anti-tax philosophy do criticize this inequality, many, too many, say nothing. Why? Perhaps because a transparent direct subsidy to the special interest group would be seen for what it is, would be less defensible in terms of the deceptive “keeping their own money” nonsense, and would be more easily understood as an outlay that harms society both in the short-term and in the long-term when it comes to the promised, but unfulfilled, economic payback. For those who want to cut government spending, try starting with the hidden expenditures deceitfully tagged as tax breaks and providing an advantage to particular private sector entities while putting other taxpayers at an economic disadvantage.

Monday, December 03, 2012

Passing the Tax Responsibility Buck

At the end of October, news stories, including this one, reported that hackers had managed to obtain millions of social security numbers, bank account data, credit card numbers, and business records by breaking in to South Carolina Department of Revenue computers. It isn’t difficult to imagine the far-reaching scope of the potential damage that has been done. A report released by investigators explained that the hacking was made possible by a Department of Revenue employee falling for a phishing email and providing username and password information.

Last week, the governor of South Carolina, according to this story, blamed the Internal Revenue Service. The governor’s reasoning is appalling. According to the governor, the IRS does not require South Carolina to encrypt social security numbers. So what? Is the South Carolina Department of Revenue incapable of figuring out on its own that sensitive taxpayer information should be encrypted? It’s not rocket science. Of course, South Carolina has now decided to encrypt social security numbers, but closing the barn door after the horses escape is too little, too late. According to another report, the Department had explored encryption on at least two previous occasions but for unknown reasons did not pursue the proposal.

According to this report, the intrusion would have been prevented had the South Carolina Department of Revenue installed a $25,000 dual password system. The IRS, on which the South Carolina governor is trying to put the blame, uses the dual password system. It’s interesting that the governor wants to blame the IRS for not requiring encryption, but does not explain why South Carolina did not imitate the IRS when it comes to dual password systems.

The Director of the Department resigned. There is no news as to the fate of the employee who responded to the phishing message.

It is a good guess that the failure to adopt the encryption proposals in the past was an attempt to save money. The same explanation probably accounts for the failure to purchase the dual password system. And to the extent that the Department’s use of forty-year-old equipment was a contributing cause of the problem, as mentioned in the official report, it’s also a good guess that failure to update the equipment was an attempt to save money. Just as Congress underfunds the IRS while heaping additional responsibilities on it while it tries to keep up with technological change, one must wonder whether the South Carolina legislature was adequately funding the Department of Revenue. So now the state is spending at least $14 million to fix the damage, including $12 million to purchase credit bureau protection for the affected taxpayers, is taking $5 million from other purposes to install encryption, and probably will spend much more before the entire mess is resolved. I wonder if the folks running the show, including those in other states and in Washington, D.C., ever heard the expression penny-wise, pound-foolish.